Newbridge: Takeover target or comeback candidate?
The Ottawa Citizen
Management and share prices are taking a pounding, but analysts aren't quite
ready to write off the company. But they want to see results. Bert Hill reports.
Six months ago analysts were wondering whether Terry Matthews would sell
Newbridge Networks to a big suitor in the rapidly consolidating
telecommunications hardware industry. Now, with Newbridge in serious trouble
and its stock at a four-year-low, they wonder what he has left to sell.
No one is counting out Mr. Matthews and his company just yet. He has been
through the fire at Mitel and in the early years at Newbridge and has always
come back.
"There is still a lot of life in Newbridge and in its product line," said George
Karidis, research director with the Yankee Group in Canada. "But the market
needs evidence that real change is going to take place."
Even as SBC Corp., a San Antonio, Texas, telephone company, was saying
yesterday that Newbridge is one of six companies that will supply $6 billion in
new equipment, analysts were slashing earnings estimates for the Kanata
company and, in many cases, lowering their recommendations.
A company in visible decline is a hard sell for customers, for employees and for
potential buyers.
"When a company loses critical mass in the market, it is very tough to get back
in the game," said Joe Skorupa, an analyst with the RHK telecommunications
research firm in South San Francisco. '"You can still have excellent technology,
as Newbridge does, but if you lose market share, it just doesn't matter any
more."
Patrick Houghton, an analyst with Sutro & Co. of San Francisco, said
Newbridge's new president, Pearse Flynn, will face tough challenges convincing
U.S. customers the company has a bright future and "is not falling into a death
spiral.
"Customers will be worried about buying equipment from a company that may
not be around to provide support. You can bet that sales people from Lucent,
Nortel and Cisco will be hammering away at that message."
Similarly, he said, top development staff at Newbridge will be restless.
"Their stock options are well under water and that is a situation where it doesn't
take much to get them to move on."
RHK was among the first analysts to spot Newbridge's problems early this year,
noting that it was losing share in key North American markets to the Ascend
Communications unit of Lucent Technologies and to Nortel Networks.
The report angered Newbridge, but it proved prescient: Newbridge was losing
ground in North American markets even though its technology was still selling
well in Europe.
The message was slow to sink in during the year as a series of earnings
warnings were triggered by other more visible problems, such as the rapid
decline of an older product line and problems building newer products quickly
enough.
There were also worries that Newbridge had missed the strong market trend to
Internet-based telecommunications gear.
Analysts now realize these troubles were a distraction from the fact that
Newbridge's order book simply wasn't nearly as full as before. The problem, Mr.
Skorupa said, was that Newbridge gear was still being tested by the big U.S.
telecommunications companies, but they weren't buying at the same rate as
before. And in some cases, they were replacing Newbridge equipment with
opposition equipment.
Newbridge stock fell 23 per cent Tuesday and another seven per cent yesterday
after it warned analysts that profits in the quarter ending Oct. 31 would be about
half of what was expected. The current stock price of $14 3?8 is only slightly
above the previous five-year low of $12.75 U.S. set on Oct. 10, 1995, and is a
far cry from the $38 range in April.
Newbridge stock rose then because of rumours of a possible sale of the
company. Newbridge was widely believed to be in negotiations with Ericsson
AG, the big Swedish telecommunications company. Ericsson was the latest and
hottest potential suitor and joined the list that included Siemens AG, a traditional
Newbridge business partner, Nokia Oy, Tellabs and Cisco.
But the deals never came about, analysts said, because Mr. Matthews wanted at
least $60 a share for the company.
And when Newbridge announced this week that it would deliver profits
amounting to less than half what analysts had been led to expect, the roof fell in
on the stock. It fell again yesterday to close at $14 3?8, a decline of $1 1?8.
On the surface, a company with a market capitalization of less than
$3 billion would be a small deal in today's market. Even Newbridge's large war
chest of cash and extensive interests in successful affiliated companies probably
wouldn't boost a sale price very much higher.
"At these low prices," Mr. Skorupa said, "there are a lot less suitors interested in
the company. People wonder how much longer it will be viable in its present
form."
And with Mr. Matthews still very much in control, with more than 20 per cent of
Newbridge stock, a hostile takeover at a low bid price is unlikely.
Mr. Houghton said Newbridge stock is likely to languish for at least the next four
months before there is any prospect of a turnaround under the direction of Mr.
Pearse.
Another reason is that many investors will sell Newbridge in December to use the
losses against the capital gains they have achieved on other stocks in the year.
Newbridge stock has fallen 52 per cent this year while Cisco Systems is up 58
per cent and Nortel is up 142 per cent.
"This is going to be a dead stock for several months," Mr. Houghton said. |
